Gold

September 15, 2009 - Gold closed today in New York at $1005.00, a new record high. Any new record is always a noteworthy event, but particularly so when the technical position and chart are so bullish.

I would like to make the following points:

1) Gold’s trading action over the past week or so has been as good as I could have hoped. Note how well bid gold was in the $990s. My sense of it is that a lot of people were on vacation or just not watching when gold and silver took off in August. Therefore, a lot of people were left standing at the station. These latecomers were waiting to buy any dips back below $1000. Given how briefly gold traded below $1000, I think these buyers are still waiting, which is important. Big moves often begin this way with a lot of people watching, on the hope of buying the dip. They may be disappointed. Gold has the potential to keep climbing higher from here.

2) The $1030 level is not a barrier. Gold traded there for only minutes back in March 2008, and as I recall, during early Asian hours. Therefore, hardly anybody could have bought there, so no one will be looking to sell there (except perhaps the gold cartel). The important barrier is right here, $1000-$1010, so today’s action is very positive. Gold is grinding upward through this barrier.

3) The gold cartel is ‘circling the wagons’ at this level, no doubt thinking they can keep gold in check. Look how open interest on the Comex has been exploding, and then ask yourself, who would sell and stand in front of this freight train other than the gold cartel? Much has been made of this huge build-up on the short side by commercials. See for example, the following Bloomberg report.
http://www.bloomberg.com/apps/news?pid=20601012&sid=aMO5xd28YIBw

4) I have always expected that the gold cartel will be blown out of the water on record open interest. After all, they are defending fiat currencies and the status quo, so they will throw the kitchen sink at gold if they have to - but their actions will not in the end stop the tidal wave of people exiting the dollar and other national currencies. So while I remain worried about this surge in Comex open interest, it is not a show-stopper. In fact, I like all the attention the CFTC's report is presently getting, that is to say, I like it from a contrary opinion point of view. It keeps people out of the market (they are letting emotions cloud their judgement), when instead they should be looking at things like gold’s clear uptrend (which is objective and factual).

There are risks here of course. For example, if we do not clear the $1000-$1010 barrier and start climbing higher by the end of October (or possibly sooner), some stale longs may begin selling. When combined with more shorting by the gold cartel, gold could be driven back below $1000. The probability of this event rises the longer gold cannot break through and then keep climbing above $1010.

That is the downside risk, but here is the upside potential. Imagine what a short covering rally there will be if gold keeps climbing and the gold cartel and other shorts start running for cover. If that happens, we could see $1400-$1500 by the end of the year, particularly if the dollar keeps sliding lower. We don't need a lower dollar for gold to take off, but it generally helps.